Shorting Volatility in a Low Volatility Environment
CBOE holds three Risk Management Conferences (RMC) around the world each year. In the Spring our RMC was held in Southern California with hundreds of market participants discussing a wide range of market topics. Despite the low level of VIX, one of the hottest topics discussed centered on being short volatility. More specifically having short exposure to US market volatility through VIX futures trading. This may seem counter intuitive since VIX has been at very low levels for the past few months, but to paraphrase one volatility trader, “It is easier to be short VIX at 12.00 than short VIX at 30.00”.
The chart below shows about six weeks of price action between the March 2017 VIX future and spot VIX index. Note as time passes the futures price gravitates toward spot VIX. This is typical regardless of the market environment, but when VIX is low it usually entails the futures moving lower as expiration approaches.
VIX goes through periods or regimes where it is at higher or lower levels. Over the past few years we have been in a low volatility regime and as long as that lasts the short volatility trade using VIX futures will remain popular. Of course, it can change quickly, so traders should keep themselves properly hedged or be prepared to cover when VIX starts to move higher.
Each CBOE Risk Management Conference is an opportunity to see what traders are doing in the volatility and equity derivatives space. There will be two more chances to attend RMC in the second half of this year. September 9 – 11 just outside London and December 5 – 6 in Hong Kong. More information is available at www.cboermc.com
RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.